Thursday, December 30, 2010

As year end approaches, many individuals are in the charitable giving mood. With that in mind, I offer one additional suggestion.

Recently, Congress has changed the nature of charitable giving, by allowing contributions to be made directly from retirement accounts to charitable organizations.

Here is one example of how it works:

Bill an IRA owner whom is 71 has Required Minimum Distributions from his IRA account. He also is very charitable by nature and customarily gives a significant amount to his church as well as other organizations. Now, Bill can schedule to make direct payments from his retirement account to the charitable organizations of his choice. These amounts are considered to be required minimum distributions for purposes of "testing" for the IRA at year end. But, the nice part is that these amounts are not taxable income to Bill. Since, he did not constructively receive these amounts, this is not taxable income to Bill even if he does not itemize (if Bill did itemize then this exercise would be kind of pointless because he would end up in virtually the same place anyway).

Please remember two things about these types of contributions. First, make sure the money is sent directly from the IRA account to the charity of your choice. Second, these amounts are not includable as "Schedule A" itemized deductions because they are amounts sent directly to the charity itself, and are therefore not included in income when they are sent.

As always, there may be specially circumstances surrounding your particular tax situation. Please consult a tax professional regarding tax consequences before making significant changes to your individual tax situation.

Wednesday, December 29, 2010

I have focused a lot of attention in the last week on retirement plans. In this post I will change gears a bit to focus on stock sales.

Recently there has been a lot of focus on stock sales as the bush tax cuts were set to expire, fortunately for most taxpayers, Congress extended the bush tax cuts to all individuals for two years. However, this doesn't mean there aren't things that people should be doing to put themselves in the best tax position.

Two smart year end tax moves that could really pay.

First, if you are planning to gift stock you should consider the best way to gift that stock.

If you are planning to give the stock to a charity, consider this. If the stock has lost money since you bought the stock, you should strongly consider selling the stock and giving the money to the charity. It is important to note that if you were to give the stock directly to the charity, your deductible contribution would be the fair market value on the date of contribution. So the only way to capture the loss, while you held the stock, would be to sell the stock, capturing the loss, and subsequently giving the money to your charitable organization.

The same rules apply when you give stock to family members (as gifts). So it only makes sense to sell the shares and give them the cash. If they choose they can take that money and buy the exact shares you just sold and their basis would equal the cash they received.

In my previous post I focused on retirement plans businesses can setup before year-end to capture tax savings. In this post I will focus on personal retirement plans and smart moves that can be made before year end to capture additional tax savings.

As you all may know IRA accounts are the primary vehicle for personal retirement.

Here are two things you should keep in mind coming into year end.

First, even if you currently contribute to a retirement plan such as a 401(k) plan, you could still potentially participate in either a traditional IRA, a Roth IRA or both. Certain income limitations apply to deductible contributions.

Second, if you plan on making contributions to an IRA account in 2010, you have until April 15th of 2011 to make tax deductible contributions to your IRA account. This may be a smart tax move since the maximum individual contribution is $5,000 with an additional $1,000 catch up available to individuals 50 years and older. Just as an example, if you are in the 25% tax bracket and are 52, you could potentially make a $6,000 contribution to a Traditional IRA. In this circumstance, if you maximized your contribution, you would also reduce your tax bill by $1,500, a very smart tax move indeed.

I also mention this because the IRS now allows for income tax refunds to be direct deposited into IRA accounts, a major benefit for taxpayers whom might not save that money otherwise.

Please note that certain taxpayers are not eligible to make deductible contributions to IRAs, please check with your tax professional before you make your decision.

Sunday, December 26, 2010

Normally, I spend less time talking about running a business than about the tax topics that effect businesses.

But even tax nerds like me can change. With that in mind. Recently I picked up a book called "Duct Tape Marketing" by John Jantsch. It is a great book with the premise that every business owner should be a good sales person, whom offers the same attributes as duct tape. Those attributes are versatility, dependability and a good all around resource for "clients". It also talks about many other subjects including creating sticky relationships with your best clients.

I would recommend this book to all small business owners who are looking to make more money, because I guess in the end, that is what marketing is all about.

Beyond marketing, this book does a good job of helping business owners analyze their business in order to improve all the facets of the business and begin to create a cohesive business strategy.

I picked it up on amazon for around $10, so it is also pretty cheap, which I also really enjoyed.

Wednesday, December 22, 2010

One of the fastest ways to lower your tax bill and potentially pay yourself is through contributions to a retirement plan.

The reason I bring this up now is that most employer sponsored plans must be in place before December 31, of the year qualifying retirement plan contributions are to start, even if funding is allowed after the end of the year.

Every year I receive at least three phone calls in the last weeks of the year wanting to know more about retirement planning.

My best piece of advice for clients is to do your homework. As a business owner there may be multiple types of retirement plans available to you. If you are a small business, and want to keep costs low, options include traditional IRA accounts for employees, SIMPLE-IRA plans and SEP-IRA plans. I will cover these three types in this posting and focus on the other more costly, but maybe more flexible plan types in a subsequent post.

First I will cover traditional IRAs. This is one of the simplest types of employee benefits you can offer. If you decide to offer this plan, you offer it as an additional salary reduction item, so as you withhold amounts from the individual's paycheck you are required to remit that amount to their IRA account directly. Any size business can participate in this type of plan. This option is nice, because it is treated similar to other payroll deductions; limited record retention is required and employees can change their withholding amount at any time. The maximum contribution for 2010 is $5,000 with additional $1,000 available for persons over 50 years of age.

Next are SIMPLE IRA Plans. This plan requires minimal initial paperwork (see my previous post SIMPLE IRA Plans, mind the details and everything will be OK). This is also a salary reduction type of plan, however only businesses that have fewer than 100 employees can participate. There is also a limited amount of required matching by the employer, but the employer only is required to match a low percentage of contributions for participating employees. Employee deferals are limited to $11,500 per employee with an additional $2,500 available for employees over 50 years of age. Certain time of service and earnings restrictions may apply to employees pursuant to limitations detailed in the plan document.

Finally, a SEP IRA Plan is a third option. This plan type is different than SIMPLE IRA plans and traditional IRA plans. This plan allows for employer contributions to employee accounts from the profits of the business. The plans are very easy to set up with a simple form available on the IRS website, and some additional record keeping required. Once the plan is set up the business owner may decide on a yearly basis whether to make a contribution to the plan or not (and the amount as long as the contribution is not discriminatory). Beyond that, the employer may exclude certain employees based upon age, years of service, and earnings. The allowable contribution to these plans is much larger. The maximum contribution to each individual is $49,000 limited to a maximum of 25% of payroll for the year.

I will cover more about year end planning with contributions, especially as it relates to S-Corporations in a subsequent post.

Friday, December 17, 2010

A portion of the "bush tax cut" extension bill, recently signed, will have a significant effect on payroll checks in 2011. Normally employees have social security taxes of 6.2% on the first $106,800 of W-2 wages. Now, employees will have a withholding rate of only 4.2% on the first 106,800 of wages for 2011 only.

Employers should prepare for this change, and adjust their withholding accordingly.

Also, note that many large payroll providers have given notice to the IRS that they will need some time to change their software. For this reason, some employees will not receive the updated withholding amount on their first check, but the amount will be adjusted in a subsequent check when the issue has been resolved.

If you have a large payroll provider, we suggest you contact your representative to verify how they plan on handling this change.

I have been out for continuing education the last few days and an interesting point came up during one of the classes. I want to use this example to clarify a lot of misconceptions that are out there concerning qualified small business stock (QSBS).

During one of the courses, the instructor, a former IRS agent, was talking about qualified small business stock. During her oration, she suggested that only S Corporations could be organized as a qualified small business (QSB). At that point I took issue. I raised my hand and clarified, that although businesses that organize as a QSB may choose to be taxed as an S Corporation, that does not preclude traditional C Corporations from organizing as qualified small businesses.

Organization whether it be a traditional organization, or organization as QSB, is separate from electing to be taxed as an S Corporation.

As I covered previously in my post dated 10/12/2010 there are specific limitations as to what types of Corporations may be organized as qualified small businesses.

Please note, an eligible QSB must organize with qualified small business stock before December 31, 2010, in order to qualify for 100% capital gain exclusion. Special holding requirements apply. Also, this must be an original issuance, not a subsequent issuance or qualified transfer.

Friday, November 19, 2010

I am not one to go around giving out business references all willy-nilly (accountants do a poor job in general of referring people to other people, maybe it's a trust thing).

But there are a few bloggers out there that I love, and that you might fall in love with as well.

One that is worth checking out, is Zeke Camusio. He is the owner of an internet marketing business out of Seattle Washington. He posts some great stuff, and always seems to have something topical for small businesses/ start-ups. Even though he operates an online marketing business, his posts cover a good variety of business topics, which I enjoy.

Tuesday, November 16, 2010

As industries go, the accounting industry is fairly well regulated. Employees (especially at larger firms) are expected to have a quality education, go through background checks before being hired, have annual performance reviews, etc. Needless to say big businesses have more to lose by hiring the wrong people than companies without an established reputation.

But, what if your business model is based upon offering as many tax returns as you can take from January 1st to April 15th (when your lease expires), or what if you are just establishing your business and need some extra help on the cheap. Businesses in these circumstances may be more inclined to cut some corners.

PTIN registration is the first step, in telling the IRS who is preparing returns within a firm. It is also very likely the first step in determining whom is at fault for faulty tax positions/ faulty tax preparation. It is also (thus far) the first step to try and make sure that anyone who is making significant tax positions on returns, is also receiving at least a minimal amount of continuing education on a yearly basis. In the near future, those whom are currently required to sign up for a PTIN would also have to pass a proficiency exam of some sort (unless these rules change).

This sounds all well and good, but many in the industry are crying foul. They want to know why individual people within a firm must register, pass an exam, and have continuing education if their work is reviewed by a signing partner, before the return is sent to the client. This is why oversight may change in the near future.

However, I look at it as a good first step. If your boss thinks you are qualified enough to put together substantial portions of a return, then you should be proficient enough to also pass an exam and have some limited amount of continuing education. Or in the more extreme cases, if you want to hang a sign in the window that says you are qualified to prepare tax returns, then you should have to prove that you are qualified before you can accept your first client.

Oh I forgot to mention, that the industry knows there are poor standards out there. That is why when you accept a new client,one of the first things you ask them for is the last three years of income tax returns. You are not only asking to get a intimate knowledge of the client, you also want to see how many mistakes, and what kind of mistakes their previous accountant made so that you might be able to get them a nice little refund as a bonus to signing on with your firm.

Monday, November 15, 2010

Every once in a while, you trip over something that is interesting and worth sharing.

The Wall Street Journal does a great job of helping businesses. Whether getting ideas on technology changes to help businesses grow, or getting a handle on the economy in your industry, using the Wall Street Journal as a resource is helpful.

With that in mind, check out this article about family businesses and their special concerns.

Also check out the small business section of the Wall Street Journal, which may provide even more helpful hints for small business owners.

Friday, November 5, 2010

If you are a small business owner you may have recently received a notice from the federal government regarding signing up for EFTPS. The information probably included a PIN and a phone number to contact the IRS directly.

Do not be alarmed by this notice. Also be sure to take note that the IRS is contacting you pursuant to proposed regulation. The fact of the matter is, that many banks are no longer going to accept payment coupons because they see no benefit in offering the service to their customers.

EFTPS is a program that directly transfers amounts from your banking institution to the federal government. You can use either the automated phone system or the online system. At this point in time, we are recommending that all of our clients sign up with EFTPS, as their bank will not be accepting coupon payments in the near future. If you need help making this change please contact your accountant, or check out this link to the IRS website.

We all know that health insurance premiums for self employed individuals (individuals filing Schedule(s) C, E, or F on their personal income tax return) are deductible on the front page of a personal income tax return. The issue becomes much muddier when you have a self employed individual that has a wife and children, whom are not covered under their own plan. One tax smart move, may be to start a section 105 medical plan.

This plan also known as a self-insured medical reimbursement plan offers many benefits (and a few pitfalls, if it is not implemented properly).

Usually, the first step in this exercise is to hire the spouse of the self employed individual as an employee. A helpful hint in this exercise is to draft an employment contract with the spouse employee, highlighting job duties, pay, hours of work required, etc. This employee will receive compensation for his/her work, but much of that compensation may end up being paid through tax-free reimbursements of medical expenses.

The second step is to create the plan. The employer must have a plan document and provide both the plan document and an agreement with all employees.This document offers them coverage under the plan. Keep signed copies of both the plan document and employee offers in a safe place. The plan document should highlight specific definitions, as well as how medical expenses will be reimbursed. In addition, most plans of this type have a maximum dollar amount that the business will reimburse for employees (this as well as other things can be amended in the future).

Benefit(s):

1. For the spouse- They receive medical reimbursements tax free.2. For the family- They would have previously filed these expenses on Schedule A and had to apply a 7.5% (of AGI) floor against these medical expenses before a deduction would have been available. With this change they do not have to worry about this ‘penalty’.3. For the business- These items are deductible against self-employment income avoiding the additional tax (SE) on their personal income tax return.

Warning- Follow these steps very carefully and do your homework. There is nothing illegal or improper about these plans, but the IRS is on the lookout for self employed individuals who are not following the rules and attempting to avoid paying their fare share of taxes. For more information consult IRC section 105, your accountant, or tax attorney.

Tuesday, October 12, 2010

One of the most overlooked aspects of incorporating is the use of Qualified Small Business Stock (QSBS), but thanks to recent changes, the use of this stock may be more attractive than ever.

For small businesses forming from September 16, 2010 through December 31, 2010, the excluded gain upon sale of the business may qualify for 100% exclusion.

There are certain limitations as to what type of businesses qualify for QSBS, as well as dollar contribution limitations. But, if you are looking to incorporate a business between now and year end you owe it to yourself to look into QSBS and talk to a tax professional about its benefits and limitations.

Please note- in order to qualify you must hold the stock for at least five years, and other limitations do apply.

Business start-up costs, also known as Section 195 costs can traditionally be expensed up to $5,000. Amounts beyond this limitation must be amortized. However, thanks to recent changes starting in 2010 tax year the allowable expense has increased to $10,000.

For the first time, certain real property can be expensed under code section 179.

First I will list items that will apply, then I will list specific items that do not apply, then I will talk about further limitations.

So to start out, types of property that definitely apply include:

1. Qualified leasehold improvement property

2. Qualified restaurant property.

3. Qualified retail improvement property

Types of property that do not apply include lodging property.

Further limitations apply to the deductibility of 179 deprecation of real property. One such example is that no amounts may be deducted in a year after 2010, so you must use your deduction in 2010, then depreciate the remaining property value as you would have without considering 179 depreciation, after the 2010 tax year (similar calculation as using section 168(k) bonus depreciation).

Thanks to the small business jobs bill, key business deductions have been extended through 2010. One of which is the section 179 deduction. For 2010 and 2011, section 179 depreciation has been increased to a maximum allowable $500,000 per business per year (limited to the extent of income). This bill also increased the beginning phase-out of property placed in service limitation to $2,000,000.

Wednesday, August 25, 2010

As readers of previous posts would know, normally I don't spend a lot of time focusing on tax exempt organizations, in this blog. But due to the number of inquiries I have recently received, I thought it would be a good time to revisit a common type of tax filing.

Tax exempt organizations are required to file their annual return by the 15th day of the fifth month after the close of their return year. Or in plain language, if your tax exempt organization has a calendar year and closes its books on December 31, 20XX. A timely return should be postmarked or filed by May 15th of the following year. There are two three month extensions that tax exempt organizations can apply for at their discretion.

Penalties for non-filing can be very steep.

Penalties for organizations with gross receipts under $1,000,000 are $20 per day with a maximum penalty of the lesser of $10,000 or 5% of gross receipts for the year. This penalty also applies if the filing information is incomplete.

Penalties for tax exempt organizations whose gross receipts are over $1,000,000 is $100 per day with a maximum of $50,000. Keep in mind that this penalty also applies for failing to file a complete return.

Tax exempt organizations that are required to file form 990-N are generally not subject to late filing penalties.

In addition to these penalties the IRS can impose penalties on responsible parties for failure to file upon request by the IRS. Failure to timely comply with an IRS request can result in penalties of $10 per day to that person. With a maximum personal penalty of $5,000.

Of course these penalties may be abated by the IRS pursuant to their discretion if the tax exempt organization shows just cause for the filing delay.

There may be other non-monetary failure to file penalties such as losing tax exempt status, see my article regarding the small tax exempt organization filing requirements.

The pension protection act of 2006 enacted a myriad of tax legislation changes. One item that was lost in the fold was its affect on Small Tax Exempt Organizations. Small tax exempt organizations are those with annual gross receipts of normally $25,000 or less.

This legislation effectively required all tax exempt organizations to file returns in order to keep their tax exempt status (prior to this legislation small charities were not required to file). In order to keep tax exempt status a small tax exempt organization must have filed at least one return in the last three years.

The legislation also created a new filing form for these small tax exempts known as the form 990-N ( or e-postcard). This filing form is very simple and is so easy to file, most tax exempt organizations should not have any reason to fail to file this form. However, many small tax exempt organizations that previously were not required to file have been caught in a precarious situation, if they have not filed any returns since the requirement came into effect in 2007.

There is good news for all those organizations who fall in this category. The IRS is offering a one-time "get out of jail free card" to all small tax exempt organizations that have not previously filed a required return. The IRS has said that all applicable organizations have until October 15 2010 to file required returns, and the IRS will not change their exempt status. In addition, they will not impose any non-filing penalties. It seems to be a win-win for the IRS and small tax exempt organizations.

If you believe your organization may be in danger there is a list published on the IRS website.

Monday, July 19, 2010

Although many small and large business owners are already aware of this strategy, some things are good enough to revisit once in a while.

This tax strategy can have the following ripple effects for your children:

Increasing their responsibilityAllows the business owner to show them how to run the business, while potentially providing tax benefits to ‘the family’.Allows children the opportunity to get a head start on tax advantaged retirement plans such as contributions to IRA’s.

How it works:

Strategy 1: Income earned by children may be tax free (federally) to the extent they do not exceed $5,450.

Example: Sam who works for her mother’s company and is claimed as a dependent of her mother, earns $4,000 cleaning the office building every week. When Sam goes to file her return, although she is a dependent of her mother she still gets her standard deduction up to her W-2 earnings (limited to the first $5,450). So her federal income tax is $0. Her mother would still have to pay Social Security tax on the income, but usually this is a small price to pay to transfer small dollar amounts to your daughter who also now cleans the office (a win-win situation).

Strategy 2: Earned income contributed to the child’s IRA.

Example 2: Sam has worked in the office for a few years and now does filing duties as well as cleaning. Because of this promotion, her annual income has increased to $9,000. While Sam still receives a $5,450 standard deduction, there is another trick she can use to shelter some of that income (if not all). She can contribute (or her parents) up to $5,000 to a traditional IRA account to reduce her taxes by $355*. Or, she can contribute up to $5,000 to a Roth IRA and receive the money tax free (at a later date) for college, or a first home purchase in the future (Sam would give up the immediate tax savings of $355, and there are certain restrictions on these types of distributions).

Recently the SBA (U.S. Small Business Administration) released a collection of videos designed to help small businesses. This series has tools and suggestions that can help businesses with topics such as marketing, preparing for growth and team building (among others). These videos are designed to be short enough to be interesting, but succinct enough to entice small business owners into action. If you have some extra time, check it out here:

1. A Grand Rapids Press writer has something interesting and topical that was not taken directly from the AP wire.

2. This article talks about what accountants have been stressing since the implementation of the MBT. Namely that this tax is much more complex than the SBT and although it charges a "surcharge" (essentially a penalty for either adding value to your company, or gasp, actually earning net income) the actual revenue the state collects from this tax is less than collections from the SBT. What this article does not point out is that many businesses are having to pay a much higher share to this tax than others, because there are many advantageous tax breaks and tax credits for certain business types.

Thursday, May 20, 2010

At no time in the history of the United States has the tax code changed so rapidly, in such a short period of time. With many changes to business and personal income taxes as well as other tax concerns, it is important to stay on top of the ever-changing tax landscape.

In the next few weeks I will attempt to cover most of the major personal and business tax changes that have either gone into effect in 2010, or that will be implemented in 2011.

Wednesday, May 19, 2010

The other day I took a phone call from one of our business clients. His business provides insurance services to other businesses. He asked me a very simple question, "I have a business client who has a group health insurance plan for him and his employees, and he needs to know whether or not he can deduct these expenses."

It became pretty clear to both of us, that although it may have been an easy question for him to ask me, the answer to that question is a lot more involved. Thanks to the prevalent use of pass-through taxable entities (S-Corps, and Partnership returns), and changes to tax provisions, deducting health insurance as a business owner is not as easy as paying the insurance bill.

If this business owner has a traditional C-Corporation the corporation would be able to deduct the full amount of the health insurance expenses as long as they have a qualified plan in place that covers all employees (without discriminating in favor of Highly Compensated Employees, or the business owners, or their families).

If this business is instead a Schedule C business or a single member LLC (disregarded entity) the business would not be able to deduct the portion of health insurance purchased for the business owner and/or his family. The health insurance expense for his normal employees (other than himself and his family) would be deductible. However, the portion of the expenses paid for his personal health insurance coverage would be includable on the front page of the business owner's personal income tax return (1040). Therefore, the business owner would be allowed to deduct on his personal return, personal health insurance expenses (to the extent that his business has earnings in the current taxable year). If the business owner had a loss for that same year, he would not be allowed to take the deduction on the front page of his personal return, but would instead include the expense on Schedule A (to the extent that health expenses exceeded 7.5% of AGI).

If this business is instead a S-Corporation, and the business owner is a more than 2% owner, the preferred method for deducting this expense is to include the amount as a "Gross-up" of W-2 wages to the owner/shareholder. This method is a little more involved, but basically at the end of the day, the deductibility is treated similarly to Schedule C business owners.

In conclusion, thanks to many changes in the tax code in recent years, businesses and individuals should be aware of costs and opportunities associated with business tax decisions. If you have concerns regarding your business's specific tax items, it is important that you use a qualified tax representative.

Monday, May 17, 2010

One of the major “insurance” opportunities the IRS offers for uncertain tax positions is called private letter rulings. These rulings are given to businesses and individuals on a case by case basis and cannot be relied upon by other taxpayers, but in the right instances can be very beneficial for taxpayers as a basis against an adverse IRS opinion. IRS private letter rulings cost between $625 and $11,500 (for a complex private letter ruling).

Business owners considering filing for a private letter ruling should do their homework before sending in a request for a private letter ruling as there are certain pitfalls associated with this type of filing, including:

1. You may have an issue that is already covered under an automatic or simplified method, that is both standardized and less costly than a private letter ruling.2. Check IRS publications for matters that are already covered under statute, court decisions, revenue ruling, revenue procedure, etc as these have a higher standing as far as the IRS is considered than private letter rulings.3. Make sure the IRS has not placed your topic of consideration on its “no ruling” list.4. Seek guidance from the IRS directly. The IRS may be able to direct you to an IRS publication or revenue ruling that speaks to your issue directly.

Remember, an IRS private letter ruling may not always be the answer, but $650 may be much more tolerable than an adverse IRS ruling down the road with associated fees and penalties that can add up quickly.

Tuesday, May 4, 2010

401(k) and Simple contribution limitations have remained the same from 2009.

401(k) contributions are limited to $16,500 for individuals, with available additional ‘catch-up’ contributions available to those ages 50 years and older of $5,500 (total available contributions of $22,000).

Simple contributions are limited to $11,500, with additional ‘catch-up’ contributions available to those 50 years and older of $2,500. (for total available contributions of $14,000).

There was a great article written recently in the New York Times called ‘Eleven easy ways to destroy your company’. It is a short one page article highlighting the most common pitfalls of new and existing businesses that business owners might be too busy to keep in mind.

If you are one of the millions of Americans who receive a form 1099-MISC at year end, you may have trouble deciding how to characterize this income. If you are conducting a trade or business you would be required to file your business activity under Schedule C. If you are not, you would likely file this income on line 21, other income on your return. But this simple decision has very different tax effects, and may not be as easy as one might think.

The IRS has defined a trade or business as, “an activity carried on for a livelihood or in good faith to make profit.” Business activity can also be classified as one that is regular, frequent, and continuous. Businesses in this regard are not required to make a profit to maintain their status as a business, but must be furthering their business interests.

If you do not fall into that previous category then your income would most likely fall into the category of other income. Other income is not subject to self-employment tax, but the trade-off with this income type is that expenses are limited to the extent of the income you have received.

Please note that the fact that you have no intentions to continue the venture beyond one year’s time may not have any effect on whether or not you were conducting business activity during the time in which you earned income (one of the major misconceptions related with business activities).

Please also see the IRS small business/ self employed section for further information, or contact your tax adviser.